General
repo haircut
What does repo haircut mean?
When you borrow cash in a repo and post bonds as collateral, the lender doesn't give you a hundred cents on the dollar — they shave a few percent off to protect themselves if the bonds drop or you default. Treasuries get a tiny haircut, junk gets a fat one. Haircuts widened violently in 2008 and that, more than anything, killed Bear and Lehman.
"Once dealers pushed the haircut on Lehman's collateral to 20 percent, the funding death-spiral was on."
Origin
Money-market jargon; the 2008 crisis literature (Gorton, Bernanke) made the term mainstream.
Frequently asked questions
What is a repo haircut?
It's the discount taken off the value of collateral in a repo (repurchase agreement) trade.
How do you use repo haircut in a sentence?
"The lender applied a 5% repo haircut, so the borrower had to post more collateral than the cash they got."
Why is a repo haircut used?
The haircut protects the lender against a drop in the collateral's market value during the term of the trade.
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